A Welcome SignWritten by Frank Manfredi
Article Date: 07-01-2004
Copyright (C) 2004 Associated Equipment Distributors. All Rights Reserved.
China's speculative bubble is cooling off.
The Chinese government’s actions to cool economic demand are bringing welcome relief to Western companies that have construction equipment production facilities there. A huge economy such as China’s cannot grow at 9 percent for long periods of time.
The percentages are somewhat misleading because demand from municipal and local governments is even higher. For example, there are 130 airports under construction. Land speculation and speculation in commodities, such as iron ore, cement and even re-bar have attracted get-rich-quick buyers in China. The building boom has the potential to develop into a full-fledged speculative bubble that can burst and leave their economy in shambles. If that happened the fallout would be felt around the world.
Don’t forget that although its government is promoting the growth of a market economy, China is a Communist country controlled by bureaucrats. For example, to cool off demand, the Chinese government enacted macro economic control policies limiting investment in raw materials, such as steel, cement and others, slowing development of new and high-tech development zones, as well as credit-tightening to limit bank financing for customers buying excavators and other construction equipment.
To illustrate the current situation, I’ve used excavator production as a proxy for the entire Chinese construction equipment market. Excavator retail sales in 2003 were approximately 30,000 and earlier this year were projected to reach 42,000 in 2004. More recent 2004 forecasts indicated the market would perhaps reach 50,000 this year, a growth rate of nearly 70 percent. It now appears the market will return to the slower growth pattern and may not exceed 40,000.
The high rate of growth in China is causing supply disruptions throughout the world. Steel prices have risen, as have prices for fuel and basic commodities. In addition, equipment manufacturers are diverting component shipments to China because prices there for machines are higher by 10 percent to 20 percent than elsewhere in the world. Those actions are in turn causing steel shortages in the United States and Europe. Component shortages have stretched out manufacturers’ U.S. order-boards for most products by months, and in some cases, until early 2005.
Within the past few weeks Komatsu Shantui, Komatsu’s excavator venture in China, shut down excavator production for 15 days due to sales decreases in China in May. Sales in May were only half of what had been projected. The sales drop reportedly happened with wheel loaders and crawler tractors, as well.
Hitachi Construction Machinery announ-ced it expects a drop of approximately $30 million in operating profit for its fiscal year, which ends March 31, 2005, as a result of declining sales of hydraulic shovels in China since April. Hitachi posted a 57 percent year-on-year gain in the number of shovels it sold in the first quarter of this year. But sales dropped 17 percent in April due to slower demand. Hitachi sales declined 31 percent in May. Furthermore, Hitachi said it expects sales of construction machinery in China to keep falling until August or September and has therefore, cut its excavator production 20 percent. Output curtailment may last one year.
A similar sales pattern was noted by Daewoo Heavy Industries Yantai facility. The operation ramped up monthly production to more than 1,500 excavators in March, but has since reduced it to 900 to 1,000 units per month.
The recent correction in the Chinese market has not given rise to widespread pessimism about China since demand remains strong even though it has declined somewhat. Steel product prices, for example, are about 30 percent higher than last year.
However, the Chinese economy is clearly slowing. When economic bubbles have burst in the past, economic activity subsequently stagnated for longer than anticipated. The world economies and construction equipment makers will be much better off if the growth in China remains at a reasonable rate for a long period of time rather than a short dramatic climb into the stratosphere.
Excerpted from July 2004 Construction Equipment Distribution.
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